Financial Analysis

Waleed Alsuwayni
Erik Morrison
12/1/2015

Financial Statement Analysis

Home Depot, Inc. is a global large scale retailer based in the U.S. The headquarters of
home Depot, Inc. is located in Atlanta, U.S.A. Home Depot sells construction goods and home
improvement goods and services. Home Depot operates large-scale retail stores in the U.S,
Mexico, U.K, China, and Canada. It has 2,270 globally. Its shares are publicly traded on the
NYSE under the ticker symbol HD. Lowes Companies, Inc. is a large-scale international retailer
that runs chain stores whose main products is home improvement products. The headquarters of
Lowes, Inc. are located in Mooresville, U.S.A. It operates chain stores in U.S, Canada, and
Mexico that sum up to 1,849 hardware and home improvement chain stores. The shares of Lowes
are traded on the NYSE under the ticker symbol LOW. Home Depot, Inc. and Lowes Companies,
Inc. operate in the same industry, home improvement stores. This paper shall conduct a financial
analysis of the two companies using various financial ratios. All values shall be in million U.S
dollars.
Current Ratio
The current ratio computes the short term solvency of a firm. It signals the ability of a
firm to pay for its short-term liabilities as and when they fall due using its current assets (Vogel,
2014). The formula for current ratio is presented below.
Current Ratio =

Current Assets
Current Liabilities

Home Depot had current assets and liabilities worth $ 15,302 and $11,269 respectively in
the financial year ending 1st February 2015. The current ratio, based on these figures is 1.358. In
2014, Home Depot had current assets and liabilities worth $15,279 and $ 10,749 respectively.
The 2014current ratio was 1.4214. Lowes, Inc. had current assets and liabilities worth $ 10,080
and $ 9,348 respectively for the financial year ending 31st January 2015. This produced a current
ratio of 1.0783. The 2014 current assets and liabilities were $ 10,296 and $ 8,876 respectively.
The 2014 current ratio was 1.16. Both companies have healthy liquidity position since their
current ratios are above one. However, both companies recorded a decline in their current ratio.
Home Depot is preferable than Lowes since it has a higher current ratio.
Home Depot

Lowes

2015

2014

2015

2014

Current Assets

$15,302

$15,279

$10,080

$10,296

Current Liabilities

$11,269

$10,749

$9,348

$ 8,876

Current Ratio

1.358

1.4214

1.0783

1.16

Acid-test or Quick Ratio

The quick ratio is a more strict liquidity ratio since it does not consider the inventory as
one of the liquid current assets. This is because inventory takes some time to be converted into
cash and may not be easily converted into cash during a crisis. It shows the ability to meet the
short-term financial obligations from the most liquid current assets. The formula for the acid test
ratio is as follows:
Acid test ratio = Current Assets- Inventory

Current Liabilities
Home Depot had a slight increase in inventory in 2015 that resulted in a drop in the quick
ratio from 0.3928 to 0.3747. Lowes also recorded a rise in inventory that caused a drop in its
quick ratio from 0.1317 in 2013 to 0.1251. Both companies are liquid since their quick ratios are
greater than zero. However, Home Depot is more liquid and thus a preferable investment.
Home Depot

Current Assets -

Lowes

2015

2014

2015

2014

$4,223

$4,222

$953

$1,385

$28,089

$22,980

$16,805

$15,908

0.3747

0.3928

0.1251

0.1317

Inventory
Current
Liabilities
Quick Ratio

Inventory Turnover
The inventory turnover indicates the frequency that a company converts its average
inventory into sales per year. The higher the turnover, the better as it indicates the ease of making
sales. A low turnover shows that the firm is facing difficulties in making sales. The formula for
the inventory turnover is presented below.
Inventory Turnover = Cost of Goods sold
Average Inventory

Home Depot and Lowes recorded an improvement in their inventory turnover in the
financial year ending 2015. Home Depot has a higher turnover than Lowes in both years and is,
therefore, better than Lowes.
2015
Home

2014

Lowes

Home

Depot
Cost of Goods sold

$54,222

Lowes

Depot
$36,665

Cost of Goods

$51,422

$34,941

sold
Inventory 2014

$11,057

$8,911

Inventory 2013

$10,710

$8,600

Inventory 2015

$11,079

$9,127

Inventory 2014

$11,057

$8,911

Average inventory

$11,068

$9,019

Average

$10,883.5

$ 8,755.5

4.7248

3.9907

inventory
Inventory turnover

4.8990

4.0653

Inventory
turnover

Accounts Receivables turnover

The accounts receivables turnover indicates the ability of a firm to collect the money it is
owed by its debtors. A high turnover is preferable since it shows that the company is aggressive
in collecting money from its accounts receivables. A low turnover indicates that the company has
loose credit policy and is reluctant in collecting money from its debtors. Below is the formula for
computing the accounts receivables turnover.
Accounts Receivables turnover = Net Credit Sales

Average net Accounts Receivables

Due to lack of expressly stated credit sales in the income statements of the two companies, the
analysis assumes that half of its sales are on credit.
Home Depot maintains a higher level of accounts receivables than Lowes. This is
responsible for the low accounts receivables turnover for Home Depot, which is lower than
Lowes turnover. In terms of credit management, Lowes is preferable since it collects its debts
faster than Home Depot.
2015
Home Depot

Lowes

2015 Sales

$41,588

$28,111.5

2014 Average Accounts

$1,398

$252

Receivables

2014
Home Depot

Lowes

2013 Sales

$39,406

$26,708.5

2013 Average

$1,395

$217

$1,398

$252

$1,396.5

$234.5

28.22

113.9

Accounts
Receivables

2015 Average Accounts

$1,484

$230

Receivables

2014 Average
Accounts
Receivables

Average Accounts

$1,441

$241

Receivables

Average
Accounts
Receivables

Accounts Receivables
Turnover

28.86

116.65

Accounts
Receivables
Turnover

Days Sales in Receivables

The days Sales in Receivables is a ratio similar to the accounts receivables turnover. It
indicates the number of days that a sale remains in the accounts receivables before receiving
money from a credit customer. The formulas for the two components are as follows:
One days sales= Net Credit Sales
365 days
Days sales in Accounts Receivables= Average Net Accounts Receivables
One Days Sales
Due to the high level of accounts receivables by Home Depot, its days sales in accounts
receivables are more than for Lowes. Both companies tightened their credit policy in 2015 since
the number of days reduced. However, Lowes is better than Home Depot since its credit sales
take a shorter time as accounts receivables.
2015

Net Credit

2014

Home Depot

Lowes

Home Depot

Lowes

$41,588

$28,111.5

$39,406

$26,708.5

$113.94

$77.02

$107.96

$73.17

$1,395

$217

Sales
One Days
Sales
2014

One Days
Sales

$1,398

$252

2013

Accounts

Accounts

Receivables

Receivables

2015

$1,484

$230

2014

Accounts

Accounts

Receivables

Receivables

Average

$1,441

$241

Average

Accounts

Accounts

Receivables

Receivables

Days Sales in 12.65

3.13

$1,398

$252

$1,396.5

$234.5

Days Sales in 12.94

Account

Account

Receivables

Receivables

3.20

Debt Ratio
The ability of a company to settle its debts is computed using the debt ratio. It shows the
proportion of assets funded by debt (Saunders, Cornett & McGraw, 2006). The financial risk
increases with the debt ratio. That is a high debt ratio indicates a high financial risk. A company
is fully financed by debt if its debt ratio is one. The debt ratio formula is as follows:
Debt ratio=

Total Liabilities
Total Assets

Home Depot has a higher debt ratio than Lowes and is thus exposed to a greater financial
risk. The debt ratio for both companies increased in 2015 indicating an increase in reliance on
creditors and consequently a rise in their financial risk. Lowes is preferable than Home Depot
since it has a lower financial risk.

2015

Total

2014

Home Depot

Lowes

$30,624

$21,859

Liabilities

Total

Home Depot

Lowes

$27,996

$20,879

Liabilities

Total Assets

$39,946

$31,827

Total Assets

$40,518

$32,732

Debt ratio

0.7666

0.6868

Debt Ratio

0.691

0.6379

Times Interest Earned

This is a ratio that compares the companys interest expense with its operating income
(Palepu & Healy, 2007). It computes the number of times that the interest expense can be from
the operating income. The greater the ratio, the greater the ease of paying the interest to creditors.
Times Interest Earned Ratio= Operating Income
Interest Expense
Lowes had no interest expense unlike Home Depot which incurred interest expense in 2014 and
2015. The times interest earned ratio for Home Depot is healthy, but Lowe is superior since it has
an infinite times interest earned ratio.
2015

Operating

Home Depot

Lowes

$10,469

$4,792

Income
2014 Interest

Operating

Home Depot

Lowes

$9,166

$4,149

$711

$0

12.8917

Income
$830

$0

Expense
Times interest

2014

2013 Interest
Expense

12.6132

Times interest

earned ratio

earned ratio
Rate of Return on Net Sales

The rate of return on net sales measures the fraction of net sales that are converted into
income. The higher the rate of return on net sales, the greater the profitability. Below is the
formula for the rate of return on net sales.
Rate of return on net sales = Net Income
Net Sales
Both companies recorded a rise in both net income and net sales. Consequently, the rate of return
on net sales increased for the year ending 2015. Home Depot has higher return than Lowes and is
thus better due to its high profitability.
2015

2014

Home Depot

Lowes

Net Income

$ 6,345

$2,698

Net Sales

$83,176

Rate of return

7.63%

on net sales

Home Depot

Lowes

Net Income

$5,385

$2,286

$ 53,417

Net Sales

$78,812

$53,417

5.05%

Rate of return

6.83%

4.30%

on net sales

Rate of Return on Total Assets

The ability of a firm to generate profits from its assets is measured using the rate of return
on total assets (Whittington, 2007). Assets are funded by creditors and equity holders. The equity
holders earn dividends while the creditors receive interest income. The sum of interest and

dividends is the total return for the funds invested in the firm. The formula for the return on total
assets is shown below.
Return on Assets = Net Income + Interest Expense
Average Total Assets
The value of average assets is obtained by dividing the assets of two consecutive years by two.
The profitability of the two companies increased in 2015 as indicated by the rise in the rate of
return on total assets. Home Depot has a superior return than Lowes and is thus a better
investment option than Lowes.
2015

2014 Net

2014

Home Depot

Lowes

$ 6,345

$2,698

Income
2014 Interest

$830

$0

2013 Interest

$ 7,175

$2,698

Net Income+
Interest

Expense

Expense
$40,518

$32,732

Assets
2015 Total

$2,286

$711

$0

$6,096

$ 2,286

2014 total

$40,518

$32,732

$41,084

$32,666

$40,801

$32,699

Assets
$39,946

$31,827

Assets
Average Total

$5,385

Expense

Interest

2014 total

Lowes

Income

Expense
Net Income+

2013 Net

Home Depot

2013 Total
Assets

$40,232

$32,279.5

Average Total

Assets

Assets

Return on

17.83%

8.36%

total assets

Return on

14.95%

6.99%

total assets

Rate of Return on Common Stockholders Equity (ROE)

The ROE is a profitability measure that computes the income generated for every dollar
invested in the firms equity. It shows the relationship between the net income and ordinary
stockholders equity. The formula for ROE is as follows:
ROE = Net Income Preferred Dividends
Average Common shareholders Equity
The half of the sum of the value of two consecutive years common equity provides the average
common shareholders equity.
The profitability of the two companies increased in 2015. Notably, the shareholders
equity reduced in 2015 and can be blamed for the unprecedented rise in the ROE. However,
Home Depot is superior to Lowes since its ROE is twice that of Lowes.
2015

2014

Home Depot

Lowes

Net Income

$ 6,345

$2,698

Preferred

$0

$0

Dividends
Net IncomePreferred

Home Depot

Lowes

Net Income

$5,385

$2,286

Preferred

$0

$0

$5,385

$2,286

Dividends
$ 6,345

$2,698

Net IncomePreferred

Dividends
Shareholder

Dividends
$12,522

$11,853

Equity 2014
Shareholder

$9,322

$9,968

Shareholder

$13,857

$12,522

$11,853

$15,149.5

$12,855

35.55%

17.79%

Equity 2014
$10,922

$10,910.5

2013 Average

common

common

shareholders

shareholders

equity

equity

Return on

$17,777

Equity 2013

Equity 2015
2014 Average

Shareholder

58.09%

24.73%

Equity

Return on
Equity

Earnings per Common Share (EPS)

The only ratio that is mandatory to be presented in the annual financial reports is the EPS.
The EPs shows the net income earned per outstanding ordinary share (Troy, 2008). The EPS does
not include the preferred stock as it is based on the common stock. Below is the formula for the
EPS.
EPS = Net Income Preferred Dividends
Number of outstanding ordinary shares
Both companies profitability rose in 2015 as illustrated by the rise in the EPS. Home Depot is
more profitable than Lowes since its EPS is higher than Lowes EPS. Therefore, it is prudent to
invest in the shares of Home Depot rather than Lowes.

2015

Net Income

2013

Home Depot

Lowes

Home Depot

Lowes

$ 6,345

$ 2,698

$5,385

$2,286

Preferred
Dividends
Number of

1,270,000,000 917,000,000

1,270,000,000 917,000,000

$5

$4.24

outstanding
common
shares.
EPS

$2.94

$2.49

Price/Earnings Ratio (P/E Ratio)

The P/E is the ratio is of the stock market price and the EPS (Kwortnik, 2010). It
indicates the market price of a dollar of earnings. The formula of the P/E ratio is indicated below.
Price/Earnings Ratio = Market price per Common share
EPS
Both companies recorded a rise in the market price of their shares as well as the EPS. Despite the
fact that Home Depots stock price is higher than Lowes, its P/E ratio is less than that of Lowes.
Thus, Lowes generates more wealth for its stockholder than Home Depot.
2015

Stock price

2014

Home Depot

Lowes

$102.82

$67.27

Stock price

Home Depot

Lowes

$72.37

$45.23

(Closing)

(Closing)

EPS

$5

$2.94

EPS

$4.24

$2.49

P/E Ratio

$ 20.56

$22.88

P/E Ratio

$17.07

$18.16

Dividend Yield
The ratio of the dividend per share and the stock market price is called the dividend yield.
It is the return on the market price per share (Aras & Yilmaz, 2008). The formula for the
dividend yield is as follows:
Dividend Yield =

Dividend per ordinary share

Market price per ordinary share

Both companies had an improvement in their dividend yield. However, Home Depot is superior
to Lowes since its dividend yield is greater than that of Lowes.
2015

2014

Home Depot Lowes

Home

Lowes

Depot
Dividend per

$2

$0.87

share
Market price

Dividend per

$1.64

$0.66

$72.37

$45.23

2.27%

1.46%

share
$102.82

$67.27

per share

Market price per

share (Closing)

(Closing)
Dividend Yield

1.95%

1.29%

Dividend Yield

In conclusion, Home Depot is more profitable than Lowes as indicated by the profitability ratios.
Home Depots ability to generate income for its shareholders outperforms Lowes. Home Depot
has a higher financial risk as indicated by its high debt ratio compared to Lowes. Lowes is more
efficient as indicated by the turnover ratios that show that Lowe is aggressive in generating sales
and collecting the money it is owed by its debtors. The liquidity ratios show that Home Depot
has a higher ability to repay its current liabilities than Lowes. The financial analysis of the two
companies illustrates that investing in the shares of Home Depot is better than investing in
Lowes shares.

References
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Kwortnik, R. (2010). Price earnings ratio.
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